July 27, 2009

Sudeep Reddy: Bernanke Feared a Second Great Depression

Bernanke Feared a Second Great Depression - WSJ.com: Federal Reserve Chairman Ben Bernanke on Sunday said he engineered the central bank's controversial actions over the past year because "I was not going to be the Federal Reserve chairman who presided over the second Great Depression."

Speaking directly to Americans in a forum to be shown on public television this week, Mr. Bernanke pushed back against Kansas City area residents who suggested he and other government officials were too eager to help big financial institutions before small businesses and common Americans.

"Why don't we just let the behemoths lay down and then make room for the small businesses?" asked Janelle Sjue, who identified herself as a Kansas City mother.

"It wasn't to help the big firms that we intervened," Mr. Bernanke said, diving into a discourse on the damage to the overall economy that can result when financial firms that are "too big to fail" collapse.

"When the elephant falls down, all the grass gets crushed as well," Mr. Bernanke said. He described himself as "disgusted" with the circumstances that led him to rescue a couple of large firms, and called for new laws that would allow financial firms other than banks to fail without going into bankruptcy.

Mr. Bernanke appeared stoic at times as he sought to explain his actions during the financial crisis at the town-hall-style meeting with 190 people at the Federal Reserve Bank of Kansas City hosted by the NewsHour's Jim Lehrer. But he also joked with the crowd, saying "economic forecasting makes weather forecasting look like physics." He quipped that he could face malpractice charges if he offered investment advice -- although he then recommended that a questioner practice diversification and avoid trying to time the stock market.

The hourlong session was the latest unusual forum where the Fed chairman has explained his actions in recent months, including bailouts and massive lending. Mr. Bernanke appeared before the National Press Club in February, agreed to an interview with CBS's "60 Minutes" in March and took questions on camera from Morehouse College students in April.

Sunday's setting offered the former Princeton economics professor a chance to speak outside of congressional testimony and speeches to economists, as his tenure leading the central bank faces increasing scrutiny. With just six months left in his term as chairman, Mr. Bernanke will learn in the coming months whether President Barack Obama will reappoint him to another four-year term or replace him.

Mr. Bernanke repeatedly used the frustrations voiced by people in the room to show his limited options during the crisis and reiterate the need for a regulatory overhaul.

David Huston, who called himself a third-generation small-business owner, said he was "very frustrated" to see "billions and billions of dollars" sent to large financial firms and called the government approach "too big to fail, too small to save."

"Small businesses represent the lifeblood of small cities, large cities and our American economy," he said, and they are "getting shortchanged by the Federal Reserve, the Treasury Department and Congress."

Mr. Bernanke responded that "nothing made me more frustrated, more angry, than having to intervene" when firms were "taking wild bets that had forced these companies close to bankruptcy."

More than 20 people asked questions of the Fed chairman, on topics ranging from bailouts to mortgage-regulation practices to the Fed's independence, a topic that drew the most forceful tone from the Fed chairman. Mr. Bernanke suggested that a movement by lawmakers to open the Fed's monetary-policy operations to audits by the Government Accountability Office is misunderstood by the public.

Congress already can look at the Fed's books and loans that could be at risk for taxpayers, he said. Under the proposed law, the GAO would also be able to subpoena information from Fed officials and make judgments about interest-rate decisions based on requests from Congress.

After appearing before lawmakers three times last week, Mr. Bernanke broke little new ground in explaining the state of the economy. He said the Fed's expected economic growth rate of 1% in the second half of the year would fall short of what is needed to bring down unemployment, which he sees peaking sometime next year.

"The Federal Reserve has been putting the pedal to the metal," he says. "We hope that's going to get us going next year sometime."

Reference Section

From Brad DeLong

J. Bradford DeLong, Professor of Economics at U.C Berkeley, a Research Associate of the NBER, a Visiting Scholar at the Federal Reserve Bank of San Francisco, and Chair of Berkeley's Political Economy major.

The Eighteen-Year-Old is going to college next year, which means that I need to think about making more money. (The idea that one might write checks to rather than receive checks from universities is now strange to me.) So I have signed up with the Leigh Speakers' Bureau which also handles, among many others: Chris Anderson; Suzanne Berger; Michael Boskin; Kenneth Courtis; Clive Crook; Bill Emmott; Robert H. Frank; William Goetzmann; Douglas J. Holtz-Eakin; Paul Krugman; Bill McKibben; Paul Romer; Jeffrey Sachs; Robert Shiller;James Surowiecki; Martin Wolf; Adrian Wooldridge.

About Brad DeLong

Leigh Speakers' Bureau

The Eighteen-Year-Old is going to college, which means that I need to think about making more money. (The idea that one might write checks to rather than receive checks from universities still seems very strange to me.) So I have signed up with the Leigh Speakers' Bureau which also handles, among many others: Chris Anderson; Suzanne Berger; Michael Boskin; Kenneth Courtis; Clive Crook; Bill Emmott; Robert H. Frank; William Goetzmann; Douglas J. Holtz-Eakin; Paul Krugman; Bill McKibben; Paul Romer; Jeffrey Sachs; Robert Shiller;James Surowiecki; Martin Wolf; Adrian Wooldridge.

J. Bradford DeLong is a professor of economics at the University of California at Berkeley, chair of its political economy major, a research associate of the National Bureau of Economic Research, a visiting scholar at the Federal Reserve Bank of San Francisco, and was in the Clinton administration a deputy assistant secretary of the U.S. Treasury.
His best work extends from business cycle dynamics through economic growth, behavioral finance, political economy, economic history, international finance to the history of economic thought and other topics.